On Jul 8, 2014, Zacks Investment Research upgraded the largest U.S. defense operator Lockheed Martin Corp. (LMT) to a Zacks Rank #1 (Strong Buy).
Why the Upgrade?
Lockheed Martin has been witnessing continuous order flows from the Pentagon’s funding list defying the so called “sequestration”. The company has received a series of contracts from the U.S. Department of Defense (DoD), ranging from big to small tickets. These defense deals are a testimony to the wide range of products at the disposal of Lockheed Martin.
In June this year, the defense giant clinched a $1.9 billion contract from the U.S. Air Force to complete production of the fifth and sixth Geosynchronous Earth Orbit (GEO) satellites. The satellites – GEO-5 and GEO-6 – come under the military’s Space Based Infrared System (SBIRS) program of which Lockheed is the prime contractor. The tasks related to the contract will be carried out in Sunnyvale, CA and will run through Sep 30, 2022.
Given the vital role played by satellites in the military space, Lockheed Martin is looking to bolster its satellite product coverage by increasingly investing in R&D and acquisitions. Last month, a $452.0 million contract was awarded to Lockheed Martin Space Systems Co. Per the contract, the company will provide reentry system/reentry vehicles (RS/RV) subsystem support as well as procure MMIII RS/RV subsystem and related support equipment.
Lockheed has also inked a deal to buy Zeta Associates, Inc. The acquisition is anticipated to be completed in the third quarter of 2014. Following the completion of the acquisition, Zeta Associates will merge with Lockheed Martin’s Space Systems division. In May 2014, Lockheed purchased Astrotech Space Operations, a company specializing in prelaunch processing of satellites.
This well-known defense behemoth delivered positive earnings surprises in the last 4 quarters with an average beat of 20.23%. Encouraging first-quarter 2014 numbers led management to raise its operating profit, earnings per share and cash from operations forecast for 2014. The international mix is also expected to rise to 20% of total sales in 2014.
Management also returns a substantial portion of its free cash flow to shareholders through share repurchases and incremental dividends. First quarter 2014 free cash flow was a record $2.0 billion of which 78% or $1.6 billion was returned to shareholders.
We believe these strong fundamentals have led to the rank upgrade.
Other Stocks to Consider
Besides Lockheed Martin, other companies in the in the aerospace/defense sector that are worth considering include General Dynamics Corp. (GD), Northrop Grumman Corporation (NOC) and Embraer SA (ERJ). These stocks carry a Zacks Rank #2 (Buy).
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